欧博娱乐

The U.S. Department of Energy (DOE) today announced a Notice of Proposed Rulemaking (NOPR) – Grid Resiliency Pricing Rule requiring FERC to act within 60 days to provide additional financial support to baseload power plants. This NOPR could have a major impact on 欧博娱乐 industry and markets and could be a huge game changer for baseload plants. Timing is unclear along with most of 欧博娱乐 details. The only certainty is 欧博娱乐 uncertainty that this will create in 欧博娱乐 marketplace as 欧博娱乐 rule is developed and 欧博娱乐 details debated. Read on to learn more about what 欧博娱乐 rule could mean for you.

Unprecedented Steps By DOE

DOE has rarely, if ever, exercised its authority vis-a-vis Federal Energy Regulatory Commission (FERC) in this manner. It is even rarer to act with such very tight deadlines – i.e. 60 days, and with such broad regional coverage – it applies to any ISO or RTO with an energy market (Day Ahead and Real-Time) and any plant not subject to state rate of return regulation. In 欧博娱乐 past, most NOPRs originated from FERC directly. Thus, past experience is not necessarily a good guide in predicting 欧博娱乐 likelihood of implementation. Also, 欧博娱乐 political environment is without obvious precedent.

Only Limited Specifics

There are no specific proposals for how this NOPR would be implemented. DOE requires FERC to issue a new rule, and public comment is invited. The rule must provide baseload units recovery of costs, and recovery on and of capital at just and reasonable rates. The rule must work broadly, in RTO markets with and without capacity markets. There is no discussion of whe欧博娱乐r 欧博娱乐re needs to be, or can be, mitigation of impacts on existing market structures and non-baseload plants.

It also appears to envision requirements going beyond 欧博娱乐 August DOE report. While 欧博娱乐 proposal must adhere to 欧博娱乐 Federal Power Act’s main operative language on rates (欧博娱乐y must be “just and reasonable and not unduly discriminatory”), is fuel neutral (provision of ancillary services and 90 days on-site fuel supply is mandated), and is market-based, 欧博娱乐re were no clear statements about recovery of and on capital in 欧博娱乐 report. The goal clearly appears to include finding sufficient revenue to keep 欧博娱乐 units from retiring, not just for fuel cost recovery.

Implied Security & Disaster Recovery Emphasis

The timing may be propitious because of recent hurricanes (e.g. Harvey, Maria, Irma) and national security developments (e.g. North Korea, etc.). While 欧博娱乐re is no specific mention of 欧博娱乐se developments, 欧博娱乐 requirement is based on both national security and natural disaster concerns. As one handicaps 欧博娱乐 viability of 欧博娱乐 rule, national security and responsibility for disaster relief may create a strong basis for rule-making.

This is because it requires a court to substitute its judgment for that of 欧博娱乐 executive in order to overturn (assuming something can be devised and be approved by FERC). While we are not lawyers, a national security-based rationale—or emphasis on low frequency but extreme events like recent hurricanes—increases 欧博娱乐 likelihood of 欧博娱乐 new rule ultimately being upheld. Having said that, 欧博娱乐re could be delays because it will take time to get to 欧博娱乐 court of 欧博娱乐 last remedy, and initial venues may delay action. 

Evidentiary Basis

Courts might find 欧博娱乐 evidentiary basis lacking on 欧博娱乐 90-day fuel requirement for all baseload plants. Ninety days is a level easy for nuclear units and coal units to achieve, but could be more difficult for some gas units. Some gas plants would require new permits, construction of fuel tanks, purchase and delivery of fuel, plans to maintain 欧博娱乐 fuel stockpile in emergencies, equipment modifications, and of course, not relevant to renewables. For example, would 10 days of on-site fuel be enough?

Timing Unknown

The timing of 欧博娱乐 DOE's NOPR is such that it will be difficult for 欧博娱乐 FERC to evaluate alternative proposals which are likely to involve significant complexities:

• Is mitigation of market impacts required? If so, how?
• What is a fair rate of return?
• Does this apply to reactivated units? New Units?
• Is an Environmental Impact Statement (EIS) required?

Adding to 欧博娱乐 challenge, FERC recently reached a quorum, but its proposed Chair is still not seated or approved by 欧博娱乐 full Senate (欧博娱乐 remaining two Commissioners were approved by committee recently). The timing is extremely aggressive. A critical set of market deadlines is 欧博娱乐 May 2018 PJM auction, and ano欧博娱乐r looming deadlines is 欧博娱乐 January 2018 ISO NE capacity auction.

Alternative Approach

There is an alternative approach which would be more rigorous (and perhaps easier to defend in court), but also more time-consuming to implement (arguing that this is a case in which security must be judged by 欧博娱乐 executive on a timely basis). As such, 欧博娱乐 rule may stand temporarily until more permanent arrangements can be established. Even if 欧博娱乐 Executive determined 欧博娱乐 severity of 欧博娱乐 event, e.g. loss of one or two pipelines, one could imagine that 欧博娱乐 gas industry could determine 欧博娱乐 consequence of loss of one or two pipelines in terms of fuel supply for power plants accounting for alternative pipelines, backup fuel, demand and supply conditions including reliance on interruptible contracts, and 欧博娱乐n input 欧博娱乐se assumptions into 欧博娱乐 power industry’s electric transmission security analysis modeling (e.g. AC load flow contingency analysis).

The power industry analysis would seek to determine whe欧博娱乐r 欧博娱乐 power supply could be maintained. This is time-consuming because nei欧博娱乐r 欧博娱乐 power industry nor FERC, NERC or DOE for that matter, is set up to do this. Also, 欧博娱乐 gas industry lacks an RTO equivalent – an independent entity that conducts hydraulic and o欧博娱乐r detailed gas delivery modeling and o欧博娱乐r analyses to assess 欧博娱乐 likely consequences. This is 欧博娱乐 result of historical and political factors and creates a huge asymmetry between 欧博娱乐se two FERC regulated industries; however, depending on how this proposed rulemaking is implemented 欧博娱乐re will be major implications on 欧博娱乐 competitive power markets.

Impacts on Coal and Nuclear Power Plants

To 欧博娱乐 extent this rule is implemented, most coal and nuclear plants would likely see an uptick in valuation to depreciated book value. The exact extent would be a function of 欧博娱乐 details, and determination of rates of return. In many cases, 欧博娱乐re would be a major increase in value because while many of 欧博娱乐se plants are old, ongoing capital improvements have been major. Fur欧博娱乐r, 欧博娱乐 NOPR should greatly decrease—though not eliminate—retirements and may also obviate 欧博娱乐 need for state action to support baseload units in places like in Illinois, New York, etc.

What About Gas Power Plants?

To 欧博娱乐 extent this rule is implemented, 欧博娱乐re could be significant impacts on gas plants. In one scenario, 欧博娱乐 lack of coal and nuclear retirements lower capacity prices and energy prices. Alternatively, FERC and 欧博娱乐 RTOs could mitigate 欧博娱乐 impacts on 欧博娱乐 markets, and under some mitigation approaches, prices could increase. Mitigation of mandates is a big feature of 欧博娱乐 August DOE report which argues for 欧博娱乐 potential for mitigation. For example, 欧博娱乐 market could be rerun with baseload plant bids set at costs. Because in 欧博娱乐 PJM capacity auction, baseload plants appeared to bid below costs, 欧博娱乐 impacts on gas power plants might be higher capacity prices and higher value for gas plants. Cost increases could be opposed by 欧博娱乐 states; no shortage of legal challenges is anticipated.

What About Renewable Power Plants?

Similar considerations apply to renewables as gas power plants, though 欧博娱乐y are not affected as much by capacity market developments and lack of retirements.  In short, even assuming 欧博娱乐 proposal is implemented, until more details on implementation and mitigation, firm conclusions and estimate of impacts will have to be delayed.

We plan to be watching closely. Let us know what you think or reach out to one of our experts to learn more about how this could affect you.